The FOMC, as widely expected, and fully discounted by financial markets, maintained the target range for the fed funds rate at 5.25% – 5.50% at the conclusion of the July meeting.
However, Powell & Co. dropped clear hints that a rate cut is on the horizon, likely as soon as the September meeting, via some notable changes to the policy statement.
Most notably, the statement flagged how the Committee is now attentive to risks on “both sides” of the dual mandate, ditching the laser-like focus on inflation that has been the dominant theme of this cycle so far.
Furthermore, in additional nods towards a September cut, the statement flagged how “some” further progress towards 2% inflation has been made – an upgrade on the prior “modest” description – while job gains were said to have “moderated”, in light of increasing signs of labour market fragility, and a more cautious phrasing than the “remained strong” description used last time out.
While not an explicit pre-commitment, this is clearly a Committee preparing itself to deliver a cut in the very near future.
Of course, all eyes will now fall on Powell’s post-meeting press conference, whereby market participants will likely be seeking greater clarity on when policy normalisation is set to begin. The Chair is likely to remain relatively tight-lipped on that front, not wishing to pre-commit to a specific policy path.
However, Powell likely will echo comments made in recent appearances that recent inflation data has brought greater confidence in a return towards the 2% target, and that the labour market is fully back in balance.
While the Committee remain data-dependent, all signs point to the first rate cut coming next time around, at the September meeting. Following this, further reductions at a quarterly pace, in line with the publication of updated Summaries of Economic Projections, seems likely, leading to a cumulative 50bp of cuts this year, marginally more hawkish than markets currently price – barring, of course, any adverse data surprises, or external shocks.
Such a pace of easing would be, roughly, in line with that set to be delivered by other G10 central banks, limiting potential USD downside, with risks to the greenback actually tilting in the opposite direction, owing to the US economy’s continued strong growth, and the anaemic pace of expansion seen elsewhere.
Meanwhile, the path of least resistance, despite the recent blip, should continue to lead to the upside for equities, with the ‘Fed put’ still alive and well, along with both economic, and earnings, growth remaining solid. The Treasury curve, finally, should continue to steepen, as the Fed increasingly move towards targeting an inflation ‘range’, as opposed to an outright 2% price level.
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